How does chargeback work
Credit Card Pre-Authorization. Processing and Processors
Pre-authorization of your credit card is technically a "hold" on your credit card credit line from a purchase placed there by a merchant who has initiated a charge, but not completely processed it. When the merchant actually completes the charge process, the pre-authorization amount will be replaced by an actual charge debited from your card.
A good example of the credit card pre-authorization process is when you arrive at a hotel and your credit card is swiped to ensure you're "good" for the cost of the hotel room and that the security checking process of your credit card matches whatever documents you supply. The card check actually acts as a processing "pre-authorization" so that the hotel can finalize the sale in the morning when you check out. For the duration of the pre-authorisation, your credit limit will be lowered by the amount of the "hold" on your card. After a certain number of days, the hold will lapse unless the charge processing is completed by the merchant.
Sometimes merchants will make use of this "pre-authorization" period to avoid processing credit card orders that are suspicious or are likely to be immediately refunded. In the past I used an account at a third party credit card processor where purchases were captured on a pre-authorization basis. It was down to me
to complete the credit card processing within 72 hours or lose the sale. I was able to screen the sales and prevent the capturing of sales that were obviously fraudulent. Also, any sales that were refunded immediately I simply didn't complete the process for and eventually the pre-authorization lapsed.
The advantage to the merchant of using this system of credit card pre-authorization screening is that they can avoid processing fraudulent payments and thereby avoid losing the processing fees of that sale and a chargeback fee should any chargeback arise from the fraudulent order. Furthermore, there's a limit to the number of chargebacks a merchant can receive in any given month, usually expressed as a percentage of total sales. By avoiding as many chargebacks as possible, the merchant ensures the safety of their merchant account.
Sometimes this pre-authentication or pre-authorization system can be confusing to customers. In the past I've said to customers who've asked for a refund that no refund is necessary, I'll just let the pre-authorization lapse. The customer then goes away happy until they discover the pre-authorization amount on their credit card (by calling their card issuer). Then they come back to me saying that I did "charge" their credit card and I had better issue a refund! Needless to say, the pre-authorisation soon expires, as I said it would, and the customer relaxes!Source: www.3rdpartyprocessors.com